Gilead Sciences, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Gilead is a research-based biopharmaceutical company focused principally on HIV/AIDS, hepatitis, and other serious diseases.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $2.427 billion | $2.122 billion | $7.114 billion | $6.185 billion |
| Product sales | $2.358 billion | $2.066 billion | $6.888 billion | $5.969 billion |
| Operating income | $1.044 billion | $1.004 billion | $2.903 billion | $2.922 billion |
| Net income attributable to Gilead | $675.5 million | $741.1 million | $1.829 billion | $2.138 billion |
| Diluted EPS | $0.85 | $0.95 | $2.33 | $2.66 |
| Operating cash flow | Not separately provided | Not separately provided | $2.489 billion | $2.661 billion |
- Q3 revenue rose 14%; nine-month revenue rose 15%. Product sales growth was led by antiviral products, including Atripla, Truvada and Complera/Eviplera. Stribild contributed $17.5 million after its U.S. approval in August.
- Product gross margin was 75% in Q3 2012 versus 74% in Q3 2011; the nine-month margin was 74% in both years.
- Q3 operating income increased about 4%, but attributable net income fell 9% and diluted EPS fell 11%. Higher R&D and interest expense were principal factors. Nine-month attributable net income declined about 14%.
- R&D expense increased 61% to $465.8 million in Q3 and 60% to $1.320 billion for nine months, reflecting clinical-program progression, including liver disease and oncology, and higher contingent-consideration valuations. SG&A rose 8% in Q3 and 22% for nine months.
- Nine-month investing cash outflow was $11.896 billion, chiefly reflecting the Pharmasset acquisition. Financing cash inflow was $1.073 billion.
Liquidity, debt and balance sheet
- At September 30, cash, cash equivalents and marketable securities totaled $2.651 billion, down 73% from $9.964 billion at December 31, 2011. Working capital was $1.078 billion, versus $11.404 billion at year-end.
- Total debt, net, was $8.771 billion, including $1.731 billion classified as current and $7.040 billion long-term. Gilead said it was in compliance with debt covenants.
- Cash-flow uses included $11.1 billion for Pharmasset and $1.05 billion of bank-debt repayments. Cash from operations was $2.489 billion. Approximately $1.91 billion of cash and securities was held in foreign jurisdictions and intended for foreign operations.
- Intangible assets rose to $11.735 billion, primarily due to $10.72 billion of acquired in-process R&D associated with Pharmasset’s GS-7977 program.
Material changes and unusual items
- Gilead completed its Pharmasset acquisition in January 2012 for approximately $11.1 billion in cash, financed with cash on hand, $3.7 billion of senior notes and bank borrowing. The acquired GS-7977 asset was valued at $10.72 billion; its value depends on development, regulatory and commercial assumptions.
- Pharmasset-related accelerated-vesting stock compensation was $193.9 million for the nine months. The company also recorded $64.1 million of nine-month increases in contingent-consideration expense, including $58.8 million in Q3.
- Interest expense rose to $89.3 million in Q3 and $275.0 million for nine months, primarily reflecting debt issued to fund the acquisition. Other expense included a $40.1 million loss on Greek sovereign bonds in the first quarter.
- Gilead received $349.7 million from factoring Spanish receivables in Q2 and recorded a $29.9 million gain, primarily from reversing an allowance. Southern European receivables totaled $826.8 million at quarter-end; $314.9 million were more than 120 days past due.
- The company repurchased $467 million of shares during the first nine months under its $5 billion repurchase authorization; $4.13 billion remained authorized at September 30.
Outlook, commentary and risks
- Management said existing capital resources and operating cash flows should meet capital needs for the foreseeable future. The filing provides no specific full-year revenue or earnings guidance.
- Management identified GS-7977 and GS-5885 HCV development as a major pipeline opportunity. Four GS-7977 Phase 3 studies were fully enrolled and underway; subject to positive results, Gilead anticipated filing for GS-7977 regulatory approval in Q2 2013. A GS-7977/GS-5885 fixed-dose combination filing was conditionally anticipated by mid-2014, dependent on trial results.
- Key risks include clinical-trial and regulatory uncertainty for HCV candidates, dependence on HIV products (Atripla and Truvada together represented 69% of Q3 revenue), generic competition and patent disputes, pricing and reimbursement pressure, foreign-exchange exposure, and customer concentration. Three U.S. wholesalers each represented at least 10% of Q3 revenue.
- Legal matters include a U.S. Attorney’s Office inquiry concerning manufacturing, quality and distribution practices; Gilead said a possible loss could not be estimated. Patent litigation and proceedings involving generic challengers, Idenix and a former Pharmasset employee may affect rights to key products or candidates; outcomes were uncertain.
- Gilead reported earlier Cayston supply constraints and a temporary restriction on new-patient access from February through September 2012. It also disclosed a November 1, 2012 closing of a Foster City office-building purchase for approximately $180 million.
Important facts for investors to verify
- Progress, durability and regulatory prospects for GS-7977 and GS-5885, including trial results and the stated filing timelines.
- Collection and aging of Southern European receivables, and whether further factoring or allowance changes occur.
- Debt maturities, especially the $1.731 billion current portion, liquidity after the Pharmasset transaction, and compliance with covenants.
- Exposure to HIV product concentration, generic entry and patent litigation, including matters affecting GS-7977 and major antiviral products.
- Whether higher R&D, contingent-consideration charges, reimbursement pressures and foreign-exchange effects alter margins or earnings.